By Stephanie Jacob
Mohsin Aziz
Maybank Research aviation analyst Mohshin Aziz believes that there are several strong share price catalysts for Asian aviation companies and the potential for several to see positive reratings during the course of 2016.
Mohshin said that while challenges to growth remain, the regional aviation industry is expected to see profit growth of about 25% (in US dollar terms) on the back of accelerated traffic and margin expansion. The airlines’ costs are also expected to decline on low fuel prices and increasing utilisation rates, he added.
Contrary to concerns of oversupply, the analyst opined that there is not enough capacity in the industry. He said: “There is not enough capacity, everyone has got it wrong. Load factors kept breaking records in 2015 and now we hear some airlines complaining that they do not have enough aircraft.
“Many airlines have under-ordered in order to avoid taking in ‘last off the line’ aircraft ahead of new model inductions such as the Airbus A320neo in the fourth quarter of 2015 (4Q15) and Boeing B737 MAX in 3Q17. This will push load factors higher (2015 was already a record) and confer airlines with some degree of pricing power.”
This should lead to short-haul yields improving, although long-haul yield levels are likely to remain pressured, he said.
Foreign exchange (forex) pressures are expected to remain in 2016 and this will impact airlines particularly those which are short on the US dollar. However, forex volatility is expected to reduce as compared to 2015, making it more manageable for the airlines.
Furthermore, the lower fuel prices will help mitigate the forex impact since many airlines have significantly reduce their fuel-hedging activities. Meanwhile, with aircraft utilisation rates improving, airlines will reduce their operating costs.
Malaysian aviation stocks the past two years have been difficult due to the three disasters that struck Malaysia Airlines and the AirAsia Group, which hit consumer sentiment hard and kept tourists away, noted Mohshin.
The implementation of the goods and services tax (GST), domestic political uncertainties and the weak ringgit also combined to make Malaysia-based aviation companies the worst performers in the region.
However, Mohshin believes that the worst is over and investors should adopt a positive outlook on the stocks going into 2016.
He said: “Gross domestic product (GDP) is firmly in growth territory, the forex outlook is stable, and domestic political disturbances have abated. Furthermore, the stocks are trading at the cheapest valuations in history, even lower than during the Global Financial Crisis. This should limit the downside risk potential.”
Mohshin believes that the demand-supply dynamics will tip in the favour of the airlines and boost yields and load factors in 2016. Malaysia Airlines has scaled back its operations and cut about 20% to 25% of its capacity as of August 2015, it is expected to further reduce this by 5% to 7% in 2016.
Maybank Research’s in-house forecasts expect traffic growth of 6.3% in 2016. This is based on its in-house GDP growth forecast of 4.5%, multiplied by the historic air-traffic growth-to-GDP multiplier of 1.4 times.
In contrast, seat capacity is only expected to grow 2% due to Malaysia Airlines’ rationalisation plans. The local airline industry’s total fleet size is only expected to grow by one aircraft which is in stark contrast from the usual growth of 12 to 18 aircraft per annum.
Mohshin said these factors should lead to a demand-supply mismatch which will be good for airlines’ load factor and yield growth.
As the worst performers in 2015, AirAsia Bhd and AirAsia X Bhd traded at their historically low price to book value (P/BV) multiples of 0.88 times and 0.80 times respectively. Nonetheless, the airlines are expected to deliver strong results in 2016, something Mohshin believes has not been priced in yet.
Trading at around five times price-earnings ratio (PE ratio) and at 0.88 times P/BV, AirAsia is currently the cheapest airline stock in the world.
Maybank Research has reiterated its “buy” call on AirAsia Bhd at lower target price of RM1.75 versus RM2.30 previously. The target price is based on financial year 2016 (FY16) one time P/BV which is premised on a floor valuation of the carrier, given that the market is cautious on the impact of the group’s associates.
Meanwhile, the research house has a “hold” call on AirAsia X Bhd with a target price of 21 sen which is based on FY16 one time P/BV.
Mohshin opined that while a turnaround is expected in 2016, a strong financial performance is only expected in the second half of the year. While earnings are expected to increase post-turnaround, the risk-reward for AirAsia X Bhd is not attractive given its unproven business model and thin capital base.
“We are concerned that the business seems to only do well when jet fuel prices are in middle ground. Otherwise, when fuel is too high and too low, AirAsia X loses its advantage,” Mohshin explained.
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